Enforcement Actions
Financial Industry Regulatory Authority (FINRA)
CASES OF NOTE
2011
NOTE: Stipulations of Fact and Consent to Penalty (SFC); Offers of Settlement (OS); and Letters of Acceptance Waiver, and Consent (AWC) are entered into by Respondents without admitting or denying the allegations, but consent is given to the described sanctions & to the entry of findings. Additionally, for AWCs, if FINRA has reason to believe a violation has occurred and the member or associated person does not dispute the violation, FINRA may prepare and request that the member or associated person execute a letter accepting a finding of violation, consenting to the imposition of sanctions, and agreeing to waive such member's or associated person's right to a hearing before a hearing panel, and any right of appeal to the National Adjudicatory Council, the SEC, and the courts, or to otherwise challenge the validity of the letter, if the letter is accepted. The letter shall describe the act or practice engaged in or omitted, the rule, regulation, or statutory provision violated, and the sanction or sanctions to be imposed.
December 2011
Steven Mark Peaslee (Principal)
OS/2009020134201/December 2011
Peaslee participated in private securities transactions by soliciting individuals to invest approximately $399,850 in an offering of a company he owned and controlled without providing written notice of his intent to participate in the sale of an offering to his member firm, and failed to obtain his firmís written approval before engaging in such activities.Peasleeís firm did not permit registered representatives to participate in the sale of private equity offerings. The offeringís purpose was to capitalize an entity through which Peaslee operated his securities business, which he wholly owned.The offering purported to be issued in compliance with Rule 506 of Regulation D of the Securities Act of 1933 (Reg. D), but Reg D documents were not filed with the SEC. 

Peaslee did not receive any written representation from any of the investors that they met the requirements to be an accredited investor. FINRA found that Peaslee negligently made untrue statements of material facts and/or omitted to state material facts in a PPM and subscription agreement for the offering. In reliance on Peasleeís misrepresentations, the customers and the non-customer invested in the offering.

Peaslee failed to establish an escrow account in the name of the issuer, his business entity, and no investor funds from the offering were ever held in an escrow account; rather, Peaslee deposited investor funds into the entityís operating account and immediately began making withdrawals. In addition, Peaslee distributed investor funds before the minimum contingency was satisfied, thereby rendering the representations in the offering documents false and misleading.
Steven Mark Peaslee (Principal): Barred
Tags:  Accredited Investor    Reg D    Escrow    Minimum Contingency     |    In: Cases of Note : FINRA
July 2011
Garden State Securities, Inc. and Kevin John DeRosa (Principal)
AWC/2009018819201/July 2011

The Firm failed to ensure that it established, maintained and enforced a supervisory system and written supervisory procedures (WSPs) reasonably designed to achieve compliance with the rules and regulations concerning private offering solicitations.

The firmís procedures were deficient in that they failed to specify, among other things, who at the firm was responsible for performing due diligence, what activities by firm personnel were required to satisfy the due diligence requirement, how due diligence was to be documented, who at the firm was responsible for reviewing and approving the due diligence that was performed and authorizing the sale of the securities, and who was to perform ongoing supervision of the private offerings once customer solicitations commenced. As a result of the firmís deficient supervisory system and WSPs, the firm failed to conduct adequate due diligence on private placement offerings. The Firm's WSPs required due diligence to be conducted on every private placement it offered, and required that such review had to be documented; the firm failed to enforce those provisions with respect to an offering. Had the firm conducted adequate due diligence, it reasonably should have known that the company had defaulted on its earlier notes offerings and that there was a misrepresentation in the private placement memorandum (PPM) with respect to principal and interest payments to investors in the earlier offerings. The Firm failed to take reasonable steps to ensure that it timely learned of the missed payments on the earlier notes offerings and disclosed them to prospective investors in the notes. Due to the firmís lack of due diligence, DeRosa sold notes issued to customers, and in connection with those sales, the firm and DeRosa mischaracterized and/or negligently omitted certain material facts provided to investors. DeRosa sold $833,000 of the notes to customers and generated approximately $37,485 in gross commissions from the sales of the notes. Through DeRosa and another registered representative, the Firm solicited customers to invest in another companyís stock but failed to conduct adequate due diligence.

The owner of an investment banking firm represented that the customersí funds would be wired to a client trust account at a bank and then forwarded to an escrow account, which a third party would control, before being invested; the firm did not take any steps to verify this claim before wiring the customer funds to the account. No one at the firm verified the existence of the client trust and escrow accounts, and, after the funds were wired, no one requested or received a bank account statement to verify the receipt and location of the funds; the firm failed to question why the wire instructions failed to reference the client trust account in the bank account title section on the form, but instead referenced the investment banking firm. Instead of directing the customersí money into the escrow account, the owner of the investment banking firm kept the funds in bank accounts he controlled and used the funds for his own benefit.

In addition, in connection with his sales of the companyís stock, DeRosa disseminated to prospective investors a presentation he had received from the owner of the investment banking company, which summarized the offering. Moreover, the presentation constituted sales literature but did not comply with the content standards applicable to communications with the public and sales literature. Furthermore, the presentation failed to provide a fair and balanced treatment of risks and potential benefits, contained unwarranted or exaggerated claims, contained predictions of performance and failed to prominently disclose the firmís name, failed to reflect any relationship between the firm and the non-FINRA member entities involved in the offering, and failed to reflect which product or services the firm was offering.

Garden State Securities, Inc.: Censured; Ordered to pay jointly and severally with DeRosa, $300,000 in restitution to investors. FINRA did not impose a fine against the firm after it considered, among other things, the firmís revenues and financial resources

Kevin John DeRosa (Principal):  Fined $25,000; Ordered to pay jointly and severally with Garden State $300,000 in restitution to investors; Suspendedfrom association with any FINRA member in any capacity for 20 business days, and Suspended from association with any FINRA member in any Principal capacity only for 2 months.

Tags:  Escrow    Due Diligence    Private Placement     |    In: Cases of Note : FINRA
April 2011
Woodrock Securities, L.P.
AWC/2009016279401/April 2011

The Firm failed to ensure that investor funds from an offering were deposited into an escrow account during the offeringís contingency period. The firm participated in a best efforts, ďminimum-maximumĒ offering an entity conducted, and the offering summary stated that if the minimum offering amount was not raised during the offering period, the funds held in the segregated account would be returned to the investors; but prior to the minimum offering amount being raised, the issuer withdrew and utilized funds from the bank account.

After only $600,000 had been raised, the issuer withdrew $199,000 and utilized the funds to make a down payment on a portfolio of defaulted auto loans so that the minimum offering amount was not obtained until a later date. The findings also included that the representation in the offering summary that investor funds would be placed in a segregated account until the minimum offering amount had been received was rendered false when the issuer utilized investor funds before the minimum offering amount was raised.

Woodrock Securities, L.P. : Censured; Fined $10,000
Tags:  Best Efforts Offering    Escrow    Minimum Contingency     |    In: Cases of Note : FINRA
Bill Singer's Comment
An all-too familiar story when it comes to mini-maxes, contingencies, and escrow accounts. Frankly, a very fair resolution by FINRA and the sanctions are quite moderate.
February 2011
Bobb Arthur Meckenstock (Principal)
OS/2008011612602/February 2011

Meckenstock failed to reasonably supervise a registered representative at his member firm in that the registered representative participated in sales of stock that were outside the course or scope of the registered representativeís employment with the firm. Meckenstock participated in certain sales of the stock himself, and failed to record the sales on the firmís books and records as required by NASD Rule 3040(c).

Meckenstock failed to submit a written request to participate in the sale of stock, failed to receive written approval to participate in the transactions and failed to provide written approval to the registered representative to participate in the sales.

Meckenstock failed to conduct sufficient due diligence on the offering, failed to investigate the nature of the individual with the issuer, failed to investigate his relationship with the issuer, failed to question him about any additional sales he may have made to firm customers, and failed to investigate compensation that the registered representative was promised or received from the sale of the interests in the company.

Meckenstock failed to adequately supervise the resale of stock through a registered investment adviser (IA) the representative owned, and failed to review the IAís books and records, which would have disclosed the representativeís sale of his shares of the stock to public customers.

Meckenstock reviewed a private placement memorandum and offering for his firm and approved it as a suitable investment, but failed to ensure that the issuer had established an escrow account, thereby failing to adequately supervise the sale of the offering and causing his firm to violate Securities Exchange Act Rule 15c2-4. In addition, Meckenstock failed to evidence his supervisory review and approval of customersí purchases of interests in numerous offerings.

Bobb Arthur Meckenstock (Principal): Fined $10,000; Suspended 30 days in Principal capacity only
Tags:  Supervision    Due Diligence    Escrow    Private Placement     |    In: Cases of Note : FINRA
Bill Singer's Comment
A classic private placement cascade effect that flows into everything that it touches -- failure to supervise, due dilly, escrow, outside activities, and on and on.
Francis Thomas Duffy (Principal)
AWC/2008013287601/February 2011
Duffy failed to fully accrue a $325,000 settlement of a customer arbitration claim against the firm as a liability on his member firmís ledgers and other records. Duffy only accrued as liabilities amounts when due under a payment schedule to the settlement agreement, and had not booked $125,000 of the settlement that had not been paid as a liability, which caused his firmís records to be inaccurate. As a result of failing to properly and accurately track assets, liabilities and expenses, the firm, while conducting a securities business, and acting through Duffy, failed to maintain its minimum net capital requirement. The deficiencies were primarily attributable to Duffy incorrectly viewing funds from private placements deposited in an escrow account of a separate but related company, as good capital to his firm before the funds were actually legally and physically available to the firm; and while Duffy was aware of past delays in the firmís ability to access funds deposited in escrow, he did not take into account the possibility of delays when estimating the firmís net capital position, and during that time period, was only performing a month-end formal computation of new capital after requisite capital was actually infused.
Francis Thomas Duffy (Principal): Fined $10,000; Suspended 10 business days in FINOP capacity only
Tags:  Escrow    Net Capital    Private Placement     |    In: Cases of Note : FINRA
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